Bitcoin Fundamentals: Supply Halving Event

As of writing and according to http://www.bitcoinblockhalf.com/ there are 54 days until Bitcoin rewards are cut in half for the second time in it’s storied history. Many speculate that a reduction in supply entering the market must logically lead to The Moon! the day after. A better approach to the analysis would be to assess the true tenor of the supply conditions based on the current era which is about to come to an end.

Bitcoin is produced when the computer nodes called “miners” successfully process a new block in the system.  Producing these blocks facilitates the transactions that are the key utility of Bitcoin.  Miners are rewarded Bitcoin by the system for performing this key role.  Through the life of Bitcoin the system is hard coded to reduce these rewards over time by giving half as much each following era until the maximum supply of roughly 21 million is produced.

Within the Reward Eras there are quarterly increments that we can analyze as key timing elements. You can find these quarterly dates here: https://en.bitcoin.it/wiki/Controlled_supply. We only have a single Reward Era of relevant value as the first Era included an extended period of time where price was virtually $0.00. Breaking the Bitcoin chart into these quarters provides a delineation of it’s extended price history. The two most striking observations that can be made are that of mean reversion and fractal pattern repetition.

By starting a ray at the beginning of the halving event on 11/26/2012 and extending it through the first quarter we can establish a mean fair value. The last 4 years of Bitcoin have witnessed amazing and cataclysmic events including the MTGOX fiasco, Silk Road hacks and Fed selloffs, and Winklevii pump to name a few. Despite these market shocks price has returned the fair value mean established in the first quarter of the Reward Era.

By looking in isolation at the first quarter of the current Reward Era and then expanding the view to the Reward Era as a whole a fractal repetition of Bubbles can be observed. Long time Bitcoin enthusiasts will know that the 2013 bubbles were not the first and second in Bitcoin’s history but more like the third and fourth overall. In spite of both these Bubbles the overall fair value of Bitcoin price reverted back to an increasing fair value mean.

So what can we draw from this? No actionable conclusions yet; only observations to carry into the next Reward Era. It would behoove traders to take note of the tenor of price action during the first quarter of the new Reward Era to see how the change in supply suggests a new fair value trajectory over the course of the remaining three quarters. This I believe is the most prescient observation of supply fundamentals and price. It is also possible that two bubbles will occur; the first perhaps occurring in the first quarter, the second occurring in the second, with the final quarters consolidating to the mean. The latter of these observations is the most subjective as it will entirely depend on the emotions of traders.